Inflation Remains On RBI’s Top Agenda: Know Its Causes And Impact

Although RBI expects it to come down to sub 5% in the second half of FY20, the RBI Governor Shaktikanta Das, on Friday pointed out that the apex bank expects inflation to decelerate.

Mumbai: RBI Governor Shaktikanta Das addresses to announce the central bank's monetary policy decisions, in Mumbai, Friday, Dec. 4, 2020. (PTI Photo)

Inflation has emerged as one of the major worries for the central bank as it hit a nearly six-and-a-half-year high of 7.61% in October. Retail inflation recorded at 7.27% in September, according to data released by the Ministry of Statistics and Program Implementation. The Consumer Food Price Index (CFPI) jumped to 11.07% in October, up from 10.68% in September. Also Read: Your Loan EMI's Won't Come Down As RBI Keeps Repo Rates Unchanged Although RBI expects it to come down to sub 5% in the second half of FY20, the RBI Governor Shaktikanta Das, on Friday pointed out that the apex bank expects inflation to decelerate. India is currently under 'Technical Recession' as per the central bank’s monthly bulletin for November. A technical recession is when a country faces a back-to-back decline (for two consecutive quarters) in the GDP. Here's more about inflation and the concerns associated with it. What is Inflation? Typically the word Inflation refers to the rise in the prices of most goods and services of daily or common use, such as food, clothing, housing, recreation, transport, consumer staples, etc. In technical terms, inflation measures the average price change in a basket of commodities and services over a period of time. On the other hand, the opposite and rare fall in the price index of this basket of items is called ‘deflation’. Globally, the term measured in percentage is indicative of the decrease in the purchasing power of a unit of a country’s currency. Who measures inflation? In India, inflation is primarily indicated through two major indices including WPI (Wholesale Price Index) and CPI (Consumer Price Index), which measure wholesale and retail-level price changes, respectively. The CPI calculates the difference in the price of commodities and services such as food, medical care, education, electronics etc, which consumers purchase. Also note that the goods or services sold by businesses to smaller businesses for selling further is reflected by the WPI. What are the main causes of inflation? Inflation as a subject has always remain a subject of debates and discussions and there are several reasons for the increase in prices of goods. The primary reason being the demand issue, which means high demand and low production or supply of multiple commodities can lead to a demand-supply gap causing a hike in prices. Also, if there is an excess money in circulation in the economy, the also it could lead inflation with money losing its purchasing power. Since people with excess money tend to spend more it can lead to increase in demand. Most importantly, spurt in production prices of certain commodities also causes inflation as the price of the final product increases. This is called cost-push inflation. Another point to be noted is that the rise in the cost of labour can also push the price of goods. Mostly, India’s inflation has been driven by high food prices but a major reason, for post-lockdown high inflation is supply disruptions along with spike in MSPs. Is Inflation worrisome? On the Individual level, inflation depends a lot upon the kind of assets s/he possesses. Those who are invested in real estate or stocked commodity, for them inflation means that the prices of their assets is set for a hike. For those who possess cash, they may be adversely affected by inflation as the value of their cash erodes. Higher inflation can impact various sectors from rural to urban including borrowers, lenders, and investors in an economy.